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Q:
What is a charitable gift?
A:
A gift is something bestowed voluntarily and without
compensation. Gifts to charity made by individuals and
entities are eligible for a deduction against income
tax or estate tax under the United States tax structure.
Charitable gifts, then, are usually defined by the Internal
Revenue Service. The IRS has expanded the dictionary
definition of “gift” in making its determination
whether a charitable gift is eligible for deduction.
Characteristics of a charitable gift include: a clear
and unmistakable intention on the part of the donor
to absolutely and irrevocably divest himself or herself
of title, dominion, and control of the property; the
irrevocable transfer of the present legal title and
dominion and control of the entire gift to the donee
so that the donor can exercise no further act of dominion
and control over it; a delivery by the donor to the
donee of the gift or of the most effective means of
commanding dominion over it; and the acceptance of the
gift by the donee. The gift must be made to an organization
recognized as charitable by the IRS. Charitable organizations
are exempt from paying tax, but not all tax-exempt organizations
are charitable. The University of Michigan is recognized
by the IRS as a charitable organization.
Q:
What limitations apply for the income tax charitable
deduction?
A:
The amount of an individual’s deduction may be
limited to 50%, 30%, or 20% of his or her adjusted gross
income depending on the type of organization the donor
gives it to and the type of property given. The deduction
for gifts made to churches,
educational organizations, hospitals, and several other
types of tax-exempt organizations is generally limited
to 50% of adjusted gross income. An individual’s
deduction for gifts to the University of Michigan is
limited to 50% of that donor’s adjusted gross income.
The deduction for gifts to other qualified charitable
organizations, such as private foundations, is limited
to 30%.
Gifts of appreciated property made to 50% organizations
are limited to 30% of adjusted gross income. Gifts of
appreciated property made to 30% organizations are limited
to 20% of adjusted gross income. Gifts other than gifts
of appreciated
property that are for the use of any organization (rather
than “to” the charitable organization) are
limited to 30% of adjusted gross income. For more information,
consult IRS Publication 526.
When a taxpayer gives a gift that is greater than the
deduction limit that year, the taxpayer may carry the
excess deduction forward for five years. The carryover
is calculated with current charitable deductions according
to the same limitations.
A corporation that files its own tax return can deduct
charitable gifts up to 10% of its taxable income, determined
without regard to the charitable deduction and certain
special deductions for the year and to net operating
loss and capital loss carrybacks to the year. Corporations
are also entitled to carryover unused deductions for
five years.
Q:
Can I put restrictions on my gift?
A:
You can place some restrictions on your gift but they
must be discussed with the University to be sure that
such restrictions are legal and acceptable to the University.
An example of a common restriction that is both legal
and acceptable to the University is to give money for
a scholarship based on need and merit.
Q:
How does the University substantiate charitable gifts
that it receives?
A:
The University issues to donors receipts that contain
the information the IRS requires a taxpayer to have
if asked to substantiate a charitable gift. Our official
receipts include the amount of cash the University receives
from you or a description of non-cash property received
(but not the value), a statement whether the University
provided anything to you in return for the contribution,
and a description and good faith estimate of the value
of any goods or services the University provided.
Q:
How do I name the University in my will or trust?
A:
The legal name of the University is the “Regents
of the University of Michigan”. We are a Michigan
constitutional corporation having the control and management
of the University of Michigan. You may provide for a
bequest or trust distribution of an amount of cash,
specific securities, personal property, etc. to the
University, or you may bequeath or have distributed
a percentage of your estate or trust. If your bequest
is for a specific school, college or other unit within
the University, the bequest or trust language should
state this. Sample bequest language can be found on
the web page for the Office of Development: http://www.giving.umich.edu/howto/planbeq.htm
The University spends the full amount of bequests and
trust distributions it receives unless the language
specifies that the amount should be retained in an endowed
account. If you want to specify that your bequest or
trust distribution be endowed, please contact the University's
Office of Major and Planned Giving as noted on the above
web page. The University has attorneys whose area of
practice is estate and charitable planning and estate
tax. Our attorneys will be pleased to work with your
attorney to draft the appropriate language to accomplish
your charitable goal. In drafting any language for a
will or trust, we strongly recommend that you seek your
own legal counsel.
Q:
What methods of giving to the University of Michigan
are available?
A:
You can give outright gifts using cash, checks, credit
cards, securities, and tangible personal property. You
can also make planned gifts, such as a bequest, trust
distribution, or by naming the University as beneficiary
of your retirement plan. Your planned gifts can also
include methods of giving that provides income to beneficiaries.
The University offers charitable gift annuities and
has a pooled income fund. The University acts as trustee
for certain types of charitable remainder trusts. You
can also arrange for annual distributions to the University
for a period of years using a charitable lead trust.
For information about any of these gifts, please see
the University’s web site on giving: http://www.giving.umich.edu/home.htm
Q:
What assets work best in making a charitable gift?
A:
By far the most common asset given to charity is cash,
in the form of a check, money order or credit card charge.
Gifts of cash are easily made and avoid complications
that might be present with noncash gifts, such as the
need to establish the proper value for income tax charitable
deduction purposes.
However,
from a tax perspective, the most advantageous assets
for lifetime gifts are appreciated securities held for
more than one year or other long-term capital gain property.
Generally such gifts entitle the donor to an income
tax charitable deduction for the full fair market value
of the donated property. Further, the donor avoids entirely
the capital gain tax that would otherwise be realized
on the sale of the asset. For gifts to private foundations,
some limitations apply and, in general, a full fair
market value deduction is available only for "qualified
appreciated stock" as defined under tax rules.
However, these limitations do not apply to public charities
such as the University of Michigan.
For
donors wishing to defer their charitable gifts until
the time of death, the best assets to use are IRAs,
accumulated retirement plan balances or other assets
upon which income tax has been deferred. By using such
assets for charitable gifts, all the accrued income
tax liability is avoided entirely. The easiest way to
gift IRAs or qualified plan balances to charity at the
time of death is simply to name the charity on a beneficiary
designation form provided by the IRA custodian or plan
administrator. As an example, assume that Mr. Smith
wishes to leave half of his estate to his children and
half to his favorite charity and that his estate consists
of $100,000 in securities and $100,000 in an IRA. He
should name his favorite charity as beneficiary of the
balance remaining in his IRA at death and should leave
the securities to his children. There will no income
tax payable on the IRA balance because of the charity's
tax-exempt status. And there be no income tax payable
by the children on the principal value of the securities
inherited. In contrast, assume that Mr. Smith left the
IRA to his children and the securities to the charity.
The charity wouldn't pay any income tax on the securities,
but the children would have to pay income tax on all
amounts they received from the IRA. This adverse tax
result can be easily avoided, if Mr. Smith selects the
right asset for the charitable gift he intends to make
at the time of death. Unfortunately, under current tax
rules Mr. Smith could not avoid income taxation on the
IRA if he used the IRA for a lifetime charitable gift;
however, a totally different tax result occurs if the
IRA is used for the charitable gift at the time of death
as this simple example illustrates.
Q:
What is a charitable gift annuity?
A:
Currently, a charitable gift annuity is one of most
popular giving arrangements that exist between charitable
institutions and their donors. A charitable gift annuity
is a simple contract or agreement between the donor
and charity. In exchange for the donor's contribution,
the charity promises to make fixed payments for life
to one or two annuitants, who are identified in the
gift annuity agreement. The amount of the fixed payments
are also specified in the gift annuity agreement and
do not vary over the life of the charitable gift annuity.
Because a charitable gift is involved, annuity payments
made under a charitable gift annuity are lower than
annuity payments made under a commercial annuity. A
charitable gift annuity is not, and should not be viewed
as, an investment. Rather, it is a way to receive annuity
payments while making a charitable donation. Because
of the charitable donation, the donor will derive tax
benefits, including a current income tax charitable
deduction (if the donor itemizes deductions), annuity
payments that are partially tax-free, and future estate
tax savings.
Charitable
gift annuities are regulated by many states. It is the
policy of the University of Michigan to comply in every
respect with all requirements of those states in which
the University offers charitable gift annuities.
Q:
I do research at the University. Can I make a gift to
a University account that I control to support my research?
A:
While a transfer to a University account over which
the donor has expenditure control is permissible, it
is not considered a charitable contribution under federal
tax rules. Consequently, the University does not consider
it as a charitable gift, and a University gift receipt
will not be issued.
Under
federal tax rules, a transfer of the type described
in this question is considered to have an element of
private benefit. For this reason, the transfer does
not qualify as a charitable contribution. The following
each have elements of private benefit and are not considered
to be charitable contributions for which University
gift receipts are issued:
"
financial aid to a specified student;
" compensation for a named faculty or staff person;
" funds directed for the purchase of equipment,
or furnishings for offices or laboratories of specified
individuals; or for their travel or sponsored activities;
" transfers to a University account over which
the transferor/donor has expenditure control.
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